Asset Float and Speculative Bubbles

52 Pages Posted: 28 Feb 2004

See all articles by José Scheinkman

José Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: August 19, 2004

Abstract

We model the relationship between float (the tradable shares of an asset) and stock price bubbles. Investors trade a stock that initially has a limited float because of insider lock-up restrictions but the tradable shares of which increase over time as these restrictions expire. A speculative bubble arises because investors, with heterogeneous beliefs due to overconfidence and facing short-sales constraints, anticipate the option to resell the stock to buyers with even higher valuations. With limited risk absorption capacity, this resale option depends on float as investors anticipate the change in asset supply over time and speculate over the degree of insider selling. Our model yields implications consistent with the behavior of internet stock prices during the late nineties, such as the bubble, share turnover and volatility decreasing with float and stock prices tending to drop on the lock-up expiration date though it is known to all in advance.

Keywords: Speculative Bubbles, Asset Float, Lock-up Expiration, Short-Sales Constraints, Heterogeneous Beliefs

Suggested Citation

Scheinkman, José and Xiong, Wei and Hong, Harrison G., Asset Float and Speculative Bubbles (August 19, 2004). Available at SSRN: https://ssrn.com/abstract=498022 or http://dx.doi.org/10.2139/ssrn.498022

José Scheinkman

Columbia University ( email )

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Princeton University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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